GOLDMAN SACHS: 'The Blockchain can change... well everything'

A supermassive black hole with millions to billions times the mass of our sun is seen in an undated NASA artist's concept illustration. REUTERS/NASA/JPL-Caltech/Handout Goldman Sachs is a big bull on blockchain, the distributed ledger software that underpins digital currency bitcoin.

In an "Emerging Theme Radar" note sent to clients on Wednesday, the bank says: "While the Bitcoin hype cycle has gone quiet, Silicon Valley and Wall Street are betting that the underlying technology behind it, the Blockchain, can change... well everything."

In its most basic form, the blockchain records ownership of bitcoin and transactions involving the cryptocurrency across a wide network of computers, as opposed to a centralized ledger.

Transactions are signed off by the parties involved using the software, checked by the network or the "crowd," then added to the blockchain — a long string of code that records all activity. Encryption in the software ensure these "blocks" can't be tampered with or altered. And the decentralized nature means the "crowd" police the whole system.

Here's a diagram Goldman produced to explain how it works: Goldman Sachs The software cuts out the need for a "trusted middleman" to sit in between parties in a transaction, such as a bank or clearinghouse. This makes transactions quicker, cheaper, and easier when compared to the current systems banks use.

Banks like Goldman are therefore keen to see if it can be adapted for use with traditional currency, rather than just bitcoin. Beyond that, there's excitement that it could be used for everything from issuing shares to "smart contracts" that only unlock funds once certain pre-conditions are met.

Or as Goldman's analyst Robert D. Boroujerdi puts it:

It [blockchain] has the potential to redefine transactions and the back office of a multitude of different industries. From banking and payments to notaries to voting systems to vehicle registrations to wire fees to gun checks to academic records to trade settlement to cataloguing ownership of works of art, a distributed shared ledger has the potential to make interactions quicker, less-expensive and safer.

It's not clear whether Boroujerdi is talking about using the specific blockchain that underpins bitcoin for all these uses, or replicating the technology to build separate blockchains.

Boroujerdi says: "Bitcoin was just the opening act, with the Blockchain ready to take center stage."

Despite Boroujerdi's seeming runaway optimism, he does note that there are some drawbacks. One worry is the potential cost of developing and maintaining the network. Another is the lack of a regulatory framework. And a third is concerns over the capacity of the blockchain.

But the big trends are encouraging — venture capital funding for the sector is growing, as is usage of bitcoin's blockchain.